Chancellor denies housing market is heading for a crash

Gordon Brown, the Chancellor, was accused of being complacent about a possible housing crash yesterday as he maintained mortgages were still their cheapest for decades.

In repeated clashes with the Treasury Select Committee, Mr Brown said house prices would "moderate" next year but denied there was either a current boom or a forthcoming "bust". He said that when current earnings levels were taken into account, borrowing costs remained affordable for both new and existing buyers.

The Chancellor repeatedly stressed that the proportion of income spent on mortgages had to be balanced against forecasts for price rises. He refused to speculate on suggestions by David Ruffley, the Tory MP for Bury St Edmunds, that the Treasury may impose VAT on house purchases.

Pressed on whether he was refusing to rule out the measure, Mr Brown said: "We will keep all of our election commitments, all the commitments we have made on taxation." In its 2001 general election manifesto, Labour pledged not to extend VAT to food, children's clothes, books, newspapers and public transport fares, but made no mention of housing.

The MPs questioned Mr Brown as the Halifax bank appeared to back Treasury forecasts that house price inflation would slow next year.

David Laws, the Liberal Democrat MP for Yeovil, asked the Chancellor whether he believed the market was going through a boom. Mr Brown refused to use the word, saying only that "there has been a very fast rise in house prices". "I look at what is happening to housing as part of what is happening to consumer spending as a whole," he told the committee. "What we are suggesting in our forecasts for next year is that consumer spending growth will moderate and as part of that the housing market will moderate as well. "

"As far as the housing market is concerned you have got to balance two factors. One is, yes, the very fast rise in house prices. But secondly because we are in a period of low interest rates, the cost of mortgages related to average incomes, for new buyers as well as existing buyers, is at one of the lowest levels in recent decades. The share of income people have had to devote to pay for mortgages has been relatively low."

Mr Laws said there appeared to be a "substantive difference in tone" between the Chancellor and the Bank of England, which has warned of the market becoming overheated. "[The Bank of England] are worried much more that the housing market is going to get overheated and is heading for a crash. You're saying no, not really." Mr Brown said: "I am never complacent and we will always be vigilant about these matters."

Mr Brown was also forced to defend his hold on the public finances after announcing in last month's pre-Budget report that he would have to borrow an extra £20bn over the next two years – much higher than he had forecast in the 2002 Budget. Mr Ruffley said the original forecast had been a "whacking error", and that taxes would have to go up if borrowing increased.

"It seems to me if you want us to keep the sobriquet Iron Chancellor and you don't want to become Rusty Brown, you will tell us what you will do if borrowing becomes higher." Mr Brown refused to apologise for getting the forecasts wrong. "It is a response to what's happening in the world economy."